Just Another BTD Moment?

by Greg RiebenNovember 03, 2018

At some point the BTD (buy the dip) world we've been living in the last few years will eventually blow up many inexperienced investor's accounts. Blindly buying because something has sold off has never sat well with me. It's probably because I started trading near the end of the tech bubble and was very active in the "Great Recession" of 2007 to 2009. Sometimes you "buy the dip" and more dips just keep coming.

I believe that if stocks begin to stabilize and once again attempt to make new highs, there will be plenty of time to participate and profit. I'm perfectly fine missing out on the first 10 or 15% of a stock's move from the bottom. This is why in last week's email I said youshouldn't be in a rush to buy stocks as a retest was probable.

All major indices in the US are now below their 200 day moving averages. The next obvious and major area of support are the lows from earlier this year. There's no guarantee that we'll go there but it could happen. The S&P 500 only has to move 5% lower to get there.

What's Up With The VIX?

When the VIX spikes it's usually a good sign that fear has reached an extreme and a bottom in stocks is very near. We saw this happen at the beginning of this year and stocks went on to make new highs.

This time around the VIX has been relatively contained as stocks slide lower and could be headed toward a test of this years lows.

If you look at the last two VIX spikes greater than 40 you can see that it spelled the end of the selling in stocks and eventually lead to higher prices. However, nothing goes straight up or straight down.

If you look at the chart below of the VIX and the S&P 500 you can see how in 2015/16 stocks sold off and bottomed but 6 months later they made a lower low with a much lower VIX reading. Could the same thing be happening right now? If it is, it could mean stocks could take out February's lows without an extreme spike in the VIX. Something to keep in mind if you are in the "buy the dip" camp.

MegaTrends

The selling continued last week as all the major indices broke below the October 11th lows. The bulls failed to show up on the retest and a new leg lower looks to have begun.

My momentum and trending stock lists continued to get culled as some of the strongest names are now showing the greatest amount of weakness. Most stocks showing decent relative strength are coming from defensive sectors such as gold/silver, telecom, consumer non-cyclical and utilities.

Remember that chasing stocks higher is not recommended and even the strongest trending stocks can experience significant drawdowns.